Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp

[jaybny]

I've been trading on MtGox since $2 BTC. Just want to give a layman explanation on how/why MtGox is trading at $250 while Bitstamp is still obove $600, and why the "no arbitrage theory" is not broken.

• Assumption is that MtGox lost some BTCs due to the malleability hack. If we assume that Silk Road 2.0 did in fact lose the BTCs due to a hack rather than fraud, its makes sense that MtGox also lost a fair amount of BTCs. Also, im sure a thorough analysis of blockchain can confirm how many BTCs were "stolen" from MtGox.
• So, if everyone withdraws all their BTCs at once from MtGox, there would not be enough BTCs for everyone.
• Big deal? MtGox can just use its own money to cover the difference, and everyone would be whole.
• So only real risk is that MtGox runs out of all BTCs and all fiat and is insolvent!
• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up
• Its a vicious cycle, a snowball effect, and a game of chicken. Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency". Also they can always buy even more BTCs with the same amount of fiat at a later date.
• Hence the "bank run" on MtGox BTC. End game is: MtGox shuts down and liquidates, and is short BTCs.

jaybny



   

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[jaybny]

my question is: where are they getting the coins?

is bitstamp doing a backdoor deal? or other exchanges?

don't follow the question. mtgox gets coins from their depositors.

[Barek]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

[jaybny]

my question is: where are they getting the coins?

is bitstamp doing a backdoor deal? or other exchanges?

don't follow the question. mtgox gets coins from their depositors.

the coins to cover their asses.....

during a liquidation, if mtgox is out of coins, they will need to use their own fiat.

prediction: as soon as mtgox is shutdown/liquidates. BTCs prices will go to the moon, on the assumption that mtgox is short. typical short squeeze. "buy the rumor, sell the news"

everyone needs to realize that this is all "normal" market actions.. BTC trading is not special, or even very volatile. trading is trading. difference is that many BTC traders are newbies to the wonderful "war" of trading.

[jaybny]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

[jaybny]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

and then blame a technical glitch. as they always do. they are really a bad crew of liars and scammers.

this time market is betting on a court ordered bankruptcy / liquidation.

[Barek]

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

You are assuming that someone stole more BTC than MtGox total profits divided by $250 (see how a low number here helps MtGox?).

And even if this is still the case, like I said, they could borrow against the fiat they are holding for their customers.

[vpitcher07]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

Gox is starting to look more and more like a ponzi scheme to me... Especially if what you wrote is true.

[jaybny]

my question is: where are they getting the coins?

is bitstamp doing a backdoor deal? or other exchanges?

don't follow the question. mtgox gets coins from their depositors.

the coins to cover their asses.....

during a liquidation, if mtgox is out of coins, they will need to use their own fiat.

prediction: as soon as mtgox is shutdown/liquidates. BTCs prices will go to the moon, on the assumption that mtgox is short. typical short squeeze. "buy the rumor, sell the news"

everyone needs to realize that this is all "normal" market actions.. BTC trading is not special, or even very volatile. trading is trading. difference is that many BTC traders are newbies to the wonderful "war" of trading.

you are naively assuming that everything in the bitcoin world is legit.

it is not.

therefore normal market behavior cannot be applied.

gox will pull a rabbit out of it's ass, and continue functioning. at a loss, of course - but they will bounce back.

you are naively assuming that everything in the trading world is legit. (mfglobal, jpmorgan silver short, CMOs, Enron, etc.. )

[jaybny]

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

You are assuming that someone stole more BTC than MtGox total profits divided by $250 (see how a low number here helps MtGox?).

And even if this is still the case, like I said, they could borrow against the fiat they are holding for their customers.

no - you cannot use $250, must use Bitstamp quotes. see how the low prices hurt them? Again, this is all assuming MtGox is shutdown and goes into liquidation. If these low prices do in fact attract more deposits, then yes, low prices help and it is in fact a ponzi scheme.. like MfGlobal. 

[Calavera]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

It was always GoxBTC you were buying on Gox, rather than real BTC.  You were paying with GoxUSD too, for that matter.  For a while previous to this current incident, GoxBTC has been valued at close to what other exchange's BTC was worth, while GoxUSD was worth less than USD on other exchanges.

If they can buy GoxBTC on their own exchange for less than they can sell it for elsewhere then they can reduce their BTC liability (i.e. they now "owe" the customer that sold them the GoxBTC fiat instead of BTC, and in fact they owe them less in fiat than what the BTC was "worth". 

[EchoingUprise]

my question is: where are they getting the coins?

is bitstamp doing a backdoor deal? or other exchanges?

don't follow the question. mtgox gets coins from their depositors.

the coins to cover their asses.....

during a liquidation, if mtgox is out of coins, they will need to use their own fiat.

prediction: as soon as mtgox is shutdown/liquidates. BTCs prices will go to the moon, on the assumption that mtgox is short. typical short squeeze. "buy the rumor, sell the news"

everyone needs to realize that this is all "normal" market actions.. BTC trading is not special, or even very volatile. trading is trading. difference is that many BTC traders are newbies to the wonderful "war" of trading.

you are naively assuming that everything in the bitcoin world is legit.

it is not.

therefore normal market behavior cannot be applied.

gox will pull a rabbit out of it's ass, and continue functioning. at a loss, of course - but they will bounce back.

I have my doubts they will bounce back. They may still be good for people trading in Japan, which I have no idea how much market share that is compared to the world. I think after this only heavy risk takers will trade on Mt Gox.

[jaybny]

we're arguing with a 12 year old. i'm out guys.

sure rat. 20 years trading experience, series 3,series 7, coded HFT strategies for multiple hedge funds, and wrote the matching engine for a bitcoin exchange.

[Barek]

no - you cannot use $250, must use Bitstamp quotes. see how the low prices hurt them? Again, this is all assuming MtGox is shutdown and goes into liquidation. If these low prices do in fact attract more deposits, then yes, low prices help and it is in fact a ponzi scheme.. like MfGlobal.  

Ok, I will elaborate. Right now the sum of all fiat deposits and BTC deposits is fixed. With each trade a fraction of both becomes the possession of MtGox (trading fees, currency conversion fees; their profit). They must use their exchange to trade one into the other.

Now comes the hack, which reduces their profits on the BTC side, likely going negative. Now they have to balance this by exchanging their fiat profits for BTC on their own exchange.

[jaybny]

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

It was always GoxBTC you were buying on Gox, rather than real BTC.  You were paying with GoxUSD too, for that matter.  For a while previous to this current incident, GoxBTC has been valued at close to what other exchange's BTC was worth, while GoxUSD was worth less than USD on other exchanges.

If they can buy GoxBTC on their own exchange for less than they can sell it for elsewhere then they can reduce their BTC liability (i.e. they now "owe" the customer that sold them the GoxBTC fiat instead of BTC, and in fact they owe them less in fiat than what the BTC was "worth". 

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

back in the day I used to sell goxUSD for $1.05, because everyone wanted BTCs and it took time to deposit into gox. so they were paying 5% for the time. used to do this on bitcoin_otc irc,using goxUSD codes. 

until now, mtgox traded as if they had enough BTCs to cover. this time is difference.   

[btbrae]

Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency".    

This just isn't true. If insolvent, then the money is gone. Gone.

[jaybny]

Now they have to balance this by exchanging their fiat profits for BTC on their own exchange.

but there are not enough real BTCs on their own exchanges. doesn't matter how low the price drops, if they don't have enough BTCs to cover the total clients BTC deposits, they will have to buy externally. nobody is depositing BTCs into gox to sell at 250. the only way they get more BTCs is to buy externally.  

[jaybny]

Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency".    

This just isn't true. If insolvent, then the money is gone. Gone.

rephrase: in case of court ordered liquidation.

[knightmb]

If people are buying from MtGox at a very low price compared to the market average and then selling them back into the open market for tremendous profit (via another exchange), then that calls into question the other "legitimate" exchanges because it does not fit the economics 101 of supply and demand. If the market is being flooded with cheap bitcoins via MtGox, then the price must go down unless the other exchanges are artificially inflating the value to avoid losing money on their side.

That would call into question more than just MtGox honoring trades, but every other exchange out there for price fixing.

[CiaIgle]

Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency".    

This just isn't true. If insolvent, then the money is gone. Gone.

rephrase: in case of court ordered liquidation.

Interesting ... under which court? even better ... under which legislation?